Tue, 14 Nov 2000

'Bad bank' that helps fuel Korean recovery

SEOUL (JP): The key to asset recovery is transparency and timing, says chairman of Korea Asset Management Corp. (Kamco) Jae-Ryong Chung.

"Transparency is vital for gaining investor trust in the assets we offer and timing is crucially essential to gain maximum value," Chung added in a recent interview.

As chief executive officer of what is now recognized as the most successful asset management company in Asia, Chung has a lot to offer to his counterparts in other crisis-hit countries, notably Indonesia, Thailand and Malaysia, in the way of maximizing value from distressed assets.

As the agency tasked to resolve the huge amount of nonperforming loans (NPLs) of banks and financial institutions in South Korea since early 1998, Kamco, often dubbed the 'bad bank', has been playing a crucial role in fueling Korea's quick, robust recovery from its economic crisis that emerged in November, 1997.

As of September, Kamco has acquired US$67.93 billion worth of bad loans (face value) at a total purchase price of $26.5 billion.

"We have thus far (as of September) resolved $34.5 billion worth (face value) of distressed assets or around 50 percent of the total," Chung proudly added.

The $34.5 billion of distressed assets, which were acquired at $15.74 billion, were resolved by Kamco at a total recovery value of $18.06 billion.

"By acting firmly and quickly in asset recovery, we play a major role in normalizing the financial sector through enhancing asset soundness and liquidity of financial institutions," Chung added.

He strongly denied that Kamco had strong-armed financial institutions to get rid of their distressed assets at fire-sale prices and disposed of the bad loans at great discounts.

Kamco's executive director Cheon-Hong Kim stressed the importance of timing in disposing distressed assets that Korean financial institutions had become burdened with as a result of the financial crisis.

"You cannot hold to a rotting potato. You need to cut off the rotten part to prevent it from spreading to other good parts," Kim said.

He recounted a case last year whereby the owners of a distressed asset, in the form of a medium-size steel mill, refused to sell the plant at a few hundreds of millions of dollars as Kamco offered to acquire that asset.

"But the mill is now assessed by the market only at a few million dollars because its production equipment has been deteriorating sharply pending the resolution of its debts," Kim said.

Chung admitted his agency is always facing a hard choice of whether to quickly sell or securitize the acquired assets or manage them for future sale.

As both Indonesia and South Korea are both under bailout programs of the International Monetary Fund since late 1997, and the disease that caused their financial crisis are, to a certain extent similar, both governments are also subject to almost the same prescription of reform measures.

The big difference, though, is that while the Indonesian economy remains mired in a fragile recovery and will have to undergo treatment in the IMF hospital until the end of 2002, the Korean economy is already back on a robust recovery path and will graduate from the IMF bailout program next month.

Korea's economy picked up strongly from a contraction of 6.7 percent in 1998 to a growth of 10.5 percent in 1999, and is seen likely to post another expansion of eight percent this year.

Latest report of the Korean central bank put that country's foreign currency reserves at $92.5 billion as of September, compared to a mere $8.9 billion at the onset of the crisis in December, 1997.

Kamco has been playing a central role in the Korean quick recovery.

Similar to its counterpart in Jakarta-- the Indonesian Bank Restructuring Agency (IBRA)-- Kamco has been assigned to buy and resolve distressed assets from financial institutions with government-guaranteed bonds.

Kim said Kamco provides all information on assets under its management to potential investors or buyers.

"We bare all information and other facts pertaining to assets, thereby making the playing field level for all potential bidders or buyers. Of most important is that, this way we gain the full trust of the investors," Kim added.

Right from the outset, Chung said, Kamco has always sought to acquire NPLs in a fair and transparent manner and to resolve them as quickly as possible but at the highest possible price.

"We therefore do not procure assets at their face value but at market prices, after taking into account various factors, including potential earning capability of the given assets in the future," Kim said.

Kamco has developed several methods for NPL disposition, including international bidding, asset-based securities issuance, public sales, debt restructuring (workout).


But each method is subject to a clear set of requirements that make the process completely transparent and fair.

"In an international bidding process, for example, we can announce the winner within 20 minutes after the opening of bids," Chung said.

This way, he added, investors fully trust Kamco and believe in whatever data, information or facts on the assets available in Kamco's computerized data bank.

Included among foreign investors who have been major buyers of distressed assets in Korea are Goldman Sachs, Morgan Stanley, Lone Star Fund, Newbridge Capital, Deutsche Bank, GE Capital and Ceberus Capital which are themselves experienced distressed-debt professionals.

Through cooperation and joint ventures with these professionals Kamco has also succeeded in achieving what its counterparts in other crisis-hit countries such as Danaharta in Malaysia and IBRA in Indonesia have not, that is creating a liquid market for distressed assets.

This requires the development of a solid team of experts capable of repackaging and selling assets directly to investors or securitizing them in various forms to meet a multitude of domestic and international investor needs.

There are several advantages that Kamco has over its counterparts in other countries.

First of all, Kamco operates in a much better environment in that it runs autonomously without political intervention. It is, however, subject to tough overseeing by the Financial Supervisory Commission (FSC), which is the powerful, supreme, financial regulatory organization which supervises banks and all other financial institutions in Korea.

The FSC, which executes its tasks through the Financial Supervisory Service, is fully in charge of implementing and supervising the reform of Korea's financial and corporate sectors.

Moreover, unlike IBRA that is in charge of restructuring and recapitalizing banks, and managing NPLs and the government blanket guarantee on bank deposits and credits, Kamco is assigned only to acquire and resolve NPLs from financial institutions.

Kamco is not involved in deposit payments or bank recapitalization as these tasks fall under the responsibility of the Korea Deposit Insurance Corporation.

As Kamco has gained great experience in the past two and a half years, it would be a waste to end it with no further use, Chung said.

Besides setting up seven asset management joint ventures with foreign companies, it also has aggressively been marketing its expertise to other crisis-hit Asian countries.

Kamco signed in August a memorandum of understanding with IBRA for technical assistance to help the Indonesian agency improve its debt restructuring and asset recovery capacity.

Similar deals also have been concluded with asset management companies in China and Malaysia and is eyeing tie-ups with debt restructuring agencies in East European countries.

Chung said though the market for distressed assets was relatively new, the NPL industry would continue to grow as many crisis-hit countries struggled to clean up their banking industries. (vin)